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DEMERGER
CORPORATE TAX PLANNING
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Meaning of DEMERGER
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In simple terms demerger is a device whereby a
company without loosing its identity or existence, transfers its one (or more)
undertaking or even a part or division thereof with all its assets &
liabilities to another company at its book value.
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Parties to Demerger:-
1. Demerged
company
2. Resulting
company
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Demerger under sec 2(19AA)
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Demerger in relation to companies means the
transfer pursuant to a scheme of arrangement under sec 391 to 394 of the
companies act 1956 by a demerged company of its one or more undertakings to any
resulting company in such a manner that-:
1. All the
property of the undertaking being transferred by the demerged company immediately
before the demerger becomes the property of the resulting company by virtue of
demerger.
2. All the liabilities of the undertaking being transferred by the demerged company
immediately before the demerger becomes the liabilities of the resulting company
by virtue of demerger
3. The property
and the liabilities of the undertaking or undertakings being transferred by the
demerged company are transferred at value appearing in its books of account
immediately before the demerger
4. The resulting
company issues issues in consideration of demerger its shares to shareholders
of the demerged company on a proportionate basis.
5. The
shareholders holding not less than three-fourth in value of the shares in
demerged company ( other than shares already held therein immediately before the
demerger or by a nominee for the the resulting company or its subsidiary)
becomes shareholder of the resulting company
6. The transfer
of the undertaking is in going concern basis
7. Has to
fulfill the conditions laid by the central government if any
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Tax
incentives
- To demerged
company
- To shareholders
- To resulting
company
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Tax
incentives to demerged company
1.
No capital gain to demerged company
2. Tax incentives to shareholders
1. Beneficial
provisions regarding counting of period of holding of new shares
2. Calculation
of the cost of acquisition of shares of resulting company as a result of
demerger shall be:=
3. (Cost of acquisition
of shares held by the assess in the demerged company) X Net Book value of
assets transferred/net worth of demerged company before the demerger
4. Calculation
of cost of shares held in demerged company
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Tax incentives to Resulting company
1. Apportionment
of depreciation between demerged company and resulting company
2. Expenditure
on telecommunication License
3. Amortization
of preliminary Expenses
4. Amortization
of expenditure incurred under voluntary retirement scheme
5. Expenditure
on prospecting minerals
6. Capital
expenditure on promotion of family planning
7. Continue
8. Provisions
relating to carry forward and set off of accumulated loss and un absorbed
depreciation in certain cases of demerger
9. Demerger and
deduction under sec 80-IAB
10. Demerger and
deduction under sec 80-IB
11. Demerger and
deduction under sec 80-IC
12. Demerger and
deduction under sec 80-IE
13. Recovery of
any expenditure incurred or deduction allowed earlier
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